How firms decide the capital payable to a retiring partner. By Marc Rosenberg Retirements & Buyouts We know there are two parts to retirement benefits: Capital Goodwill The issues involved in determining the capital are very few and straightforward compared with the goodwill determination, which is far more intricate and nuanced. In fact, there are four main variables in calculating the capital. This compares to 25 variables for goodwill.
Forget “one times fees” for goodwill. By Marc Rosenberg Retirements & Buyouts One of the first and most critical decisions in creating a partner retirement plan is the overall valuation of the firm. The value of a CPA firm has two components: Capital. The valuation of capital for internal partner retirement purposes is almost always the capital on the firm’s balance sheet. If the capital is measured on the accrual basis, the two largest accounts by far will be WIP and A/R. They should be conservatively reserved.
Plus: Making the math work. By Marc Rosenberg Retirements & Buyouts Why are CPA firms deficient at succession planning? It is abundantly clear that CPA firms have succession planning challenges. Partners overwhelmingly prefer the exit strategy of passing on the firm to younger partners vs. merging out of existence. But history shows that the vast majority fail at moving their firms into the next generation. What holds them back? The answer lies in the classic Pogo cartoon line: “We’ve seen the enemy and the enemy is us.”
Valuing a CPA firm for partner retirement purposes is much different than a valuation for merger purposes. By Marc Rosenberg Retirements & Buyouts Profitable, attractive firms, generally under $2 million, sold in a market with many potential buyers, will often fetch 110 percent to 150 percent of fees. If this is the case, why do CPA firms value goodwill for retirement purposes at no more than 100 percent of fees and usually, 80 or 90 percent of fees? Here are six good reasons why:
9 factors that ensure retirement plans will pay off. By Marc Rosenberg Retirements & Buyouts When a partner group crafts their firm’s partner retirement plan, they are hopeful that the plan will play an important role in their financial futures. They are guardedly optimistic that their buyouts will be realized. But the path toward the retirement payday is a perilous one. Many actions are necessary and a number of obstacles must be overcome for a firm’s partner retirement plan to pay off.
1 in 6 firms have no formal, written exit plans in place. By Marc Rosenberg Retirements & Buyouts Despite the clear, substantial value of a CPA firm, roughly 15% of multi-owner CPA firms – mostly firms with up to four partners – do not have a formal, written partner retirement plan. Why?
Do it wrong and your firm could lose a pile of money. By Marc Rosenberg Retirements & Buyouts Partners have a natural tendency to view the firm’s partner retirement plan as a personal savings plan, but that’s not how these plans work. CPA firm retirement plans are quite different.
Apparently, they’re worth it. By Marc Rosenberg Retirements & Buyouts An ample supply of willing buyers is a critical factor that strengthens and confirms the value of any asset, let alone a CPA firm. Virtually every firm, from sole practitioners to the Top 100, is eager to acquire a smaller firm. Why is this?
Look at the revenue stream. Goodwill is another story. By Marc Rosenberg Retirements & Buyouts To illustrate a CPA firm’s value, let’s use an example of a plain-vanilla or average firm: Annual revenues: $6 million. Six partners with ages spread evenly between 45 and 62. Average partner income: $350,000. Ratio of professional staff to partner is 3.5. Firm is located in a city with a population in excess of 1M. Clients are all in common industries such as manufacturing, real estate, health care, etc. No niches or specialties. Services are all traditional annuity types such as accounting and tax. The firm’s accrual basis capital, primarily WIP and A/R, is $1.2M. Now, let’s compute the value.
Planning for changing expectations…
16 ways to tweak your compensation systems to get and keep the right clients. If your partners are putting up a fight to keep clients who should be let go, take a look at your compensation system. It’s not just about billable hours. August Aquila, Creating the Effective Partnership, suggests 16 tweaks to your firm’s compensation system. While the list is not exhaustive, it does provide criteria that firms can consider beyond revenue.
The compensation trap that turns winners into losers. By August Aquila Creating the Effective Partnership The focus on most CPA firms is on billable hours. While there is nothing inherently wrong with this focus, it has become the overriding focus of firms. There is nothing wrong with making money today, but what about building for the future? With “today” being the dominant focus, what is the encouragement to CPAs to innovate? In most firms there is no alignment with innovation and compensation. You will never have innovation unless you allocate some time and reward to making it happen.